YOU ASK:

Why do I have to pay mortgage insurance?

WE ANSWER:

Actually, you really don't have to, if you are able to pay 20% in down payment. This 20% is based on the purchase price or the appraised value of the house, whichever is lower.

Now, if you can't come up with the 20% in down payments, you will have to get mortgage insurance. The bank or lending institution will not grant you the loan unless you get the mortgage insurance. The good thing about buying mortgage insurance, though, is that you can now be allowed to pay a small down payment - and you can already occupy the house, even when you can't quite call it your own yet.

The bank would like to protect itself from bad borrowers. And since you cannot show sufficient proof that you will not bail out on the mortgage, they would really require that the loan be covered with mortgage insurance.

And that's not the only insurance policy that the bank may require. The bank may also require hazard insurance on the mortgaged property. This is all part of the bank's strategy to minimize their possibility of their loss.

The mortgage insurance will pay the bank in case you are unable to keep up with the monthly payments. But this does not mean that you go scot-free. Aside from a negative hit in your credit rating, the bank or the insurance company may try to go after your other assets in an attempt to recover what they have spent towards your loan.

Thus, mortgage insurance becomes a necessity if you want to get that house even without having the down payment.

You can, however, try to get rid of the insurance as soon as you can. You can do this by achieving at least 20% in equity. You should also make sure that you have not given any payments in the past year. That may prevent you from cancelling the mortgage insurance as soon as you can.

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